When the coalition Government unveils its Comprehensive Spending Review on
Wednesday following weeks of speculation, outsourcing companies will be
watching particularly closely where the axe falls on public spending.

9:00PM BST 16 Oct 2010

Serco

Serco Group

£6.28

Questor says HOLD

Support services companies, such as Serco, have stressed that the spending cuts should be regarded as an opportunity rather than a threat.

When Serco unveiled its half-year results in August – pre-tax profits had surged 21.6pc to £101.4m – Chris Hyman, chief executive, said: “Many of our government and commercial customers are seeking to reduce costs. We have the necessary skills to help them.” He highlighted education, prisons and welfare-to-work programmes as areas where Serco could potentially increase its involvement. Serco is also upping its presence in health care.

However, the spending cuts are more likely to provide jam tomorrow than today. Francis Maude, Cabinet Office minister, has called on outsourcers including Serco to help the Government reduce the cost of delivering services and expects companies to be prepared for some squeeze on margins.

Analysts at Merrill Lynch, who have a “neutral” rating on Serco, said last month that Mr Maude’s plans “may result in a decline in revenue from existing UK contracts and slower overall growth in the first half of 2011, but new opportunities stemming from the opening up of public services to competition should drive acceleration of growth into 2012”.

Given that Serco’s contracts are linked to essential front-line services, providing the shares with useful defensive qualities, and it has expanded its international footprint, Questor is confident about the company’s future.

But as the shares are currently trading at 18.5 times 2010 earnings and providing a yield of just 1.2pc, Questor is holding fire on buying more of Serco until the spending cuts are revealed and we have some clarity on what the Government will actually outsource.